Underwater Homeowners Start To Lose Patience

The seemingly endless mortgage crisis has San Diego homeowners seeing foreclosure as a good alternative, and housing experts saying principal forgiveness is the only good answer.

SAN DIEGO  Rolling Hills Ranch looks like a pretty plush neighborhood. Three thousand square-foot stucco homes line the winding streets, and they’re framed by a panorama of nearby mountains. But like a lot of Chula Vista neighborhoods developed in the past decade, its new homes went to market near the height of the housing bubble. Now homeowners here are underwater, owing more than their homes are actually worth.

Above: New homes in Rolling Hills Ranch went on sale near the height of the housing bubble, and the neighborhood now faces foreclosures and short sales.

Chula Vista Councilman Rudy Ramirez says the large number of empty, foreclosed homes here allowed a scam artist to forge their titles, and actually rent them out. The neighbors were not happy.

“People were complaining about, you know, loud parties,” he said. “In a lot of cases these were not outstanding citizens. This must have been, in some ways, folks that couldn’t get housing anywhere else because of their rental history.”

The continued drag on the housing market is the bug in the salad of our economic recovery. The number of San Diego homeowners who owe more than their homes are worth may be as high as 50 percent, depending on who you ask.

Many homeowners who face foreclosure are beginning to lose patience, as the housing recession just won’t let up and they seem they seem to remain hopelessly behind in their effort to win equity.

Ali Tarzi counsels underwater San Diego homeowners for Community Housing Works. He says these days getting an interest rate reduction, to lower monthly payments, isn’t enough for many people, and the prospect of abandoning the house is looking more and more attractive.

“In today’s environment is it feasible to keep my home?” he said, posing a common question among people who owe much more than their homes are worth. “Is it feasible to stay in my property long-term, knowing that I’ll never get my equity back, knowing that the rental market may be much more affordable than this huge upside-down mortgage I’m paying?”

Tarzi, and many others, say resolving the home price recession must involve forgiveness of principal on the loan. Matt Battiata, president of Battiata Real Estate Group, questions whether that is a realistic goal. But he admits that modified loans, with lower interest rates have been very hard to get. And even when a homeowner convinces a bank to approve one, they often wonder why they bothered.

“They spend a year trying to get a loan modification, and they’re told at the end of the process, ‘Hey, great news! You’re going to get a loan mod. We’re dropping your payment by $200 a month.’ And they’re incredulous. What do you think $200 is going to do for me?” said Battiata.

Banks take losses on homes all the time, when homes go to foreclosure. But while foreclosures and short sales may be the cost of doing business, loan mods or forgiving loan principal are different. Battiata said banks fear that if they modify loans or forgive principal, everybody is going to want same deal.

If principal forgiveness is the real answer, the question comes up: Who’s going to lose out? Tim Sullivan, with John Burns Real Estate Consulting, says the arrow points to the banks.

“That’s really where the focus becomes,” he said. “The banks are the mortgage holders. And they are ultimately the ones that would have to take the haircut.”

“Some banks will on a case-by-case basis look at principal reductions to see if that’s in the best interest of the borrower and the lender, but it probably wouldn’t be the first solution they would look to,” said Mills.

There are some people who have gotten some relief.

Mark Turner is homeowner in his 40s with a goatee beard and a sunny nature. He must have needed that good cheer for what he went though. He bought a house in Spring Valley for $660,000 that’s now worth $425,000. He’s underwater despite having put all of his savings, $150,000 down. A couple years ago, he lost his job and couldn’t keep up with his mortgage payments.

“I got notices of default. I got foreclosure notices. I even got an auction sale date, when they were actually going to sell the house,” he said.

But he got another job, and he got some help from home counselors linked to the Department of Urban Development (HUD). They convinced the bank to reduce Turner’s mortgage payments to $3,100 a month, down from $4,700. Still, I asked Turner why he didn’t walk away from the house. He got no principal forgiveness. He still has a mountain of mortgage debt and the unlikelihood he will ever pay off his home.

“I’ll give a couple of reasons why I didn’t do that,” he responded. “First, this is the first time I’d bought a home. Second, my parents never, ever bought a home, neither did my siblings. And I have a family, a wife and kids.”

Turner remains optimistic that someday he’ll be able to sell his home and buy something more affordable.

“I feel that this is just the best place for us to be. I just want to ride this wave out and hopefully, the economy will get better and things will turn around, is my outlook,” he said.

In Chula Vista, an estimated 8 percent of new homes sold in the last decade have been lost to foreclosure. All people agree, it’s in the best interest of everyone to keep people in their homes. Foreclosures make banks to lose money; they drag down real estate prices and ruin credit ratings. But trick is deciding how you prevent foreclosures, and whose ox will get gored.

Home mortgage counselor Ali Tarzi shares some of Mark Turner’s optimism. The Obama administration has agreed to increase financial incentives for banks to reduce principal. Tarzi adds that the multi-state home-mortgage settlement provides not only money for loan forgiveness, but also an enforcement mechanism to hold over banks.

“So I can tell you that for the first time in a long time, I am optimistic about these changes,” he said.

But the downward pressure of distressed properties on San Diego home prices will take years to resolve. The question is whether it’ll be resolved through more foreclosures, or homeowners and banks striking some kind of a deal.

Thanks for the great article. I am in the Bay Area and we are just as bad off as you all down south. The real question will be whether at some point ALL lenders will be required to forgive principal. Not just some banks. (The biggies) That is what will really help us all...We are in the process of walking away on our home due to being underwater about 150K and the payment doubling due to so much neg. amm. It's so sad and frustrating. We are helpless.

I've heard endless horror stories about "mortgage modification" which all end the same way -- the banks "lose" the paperwork, leaving the homeowner hamstrung. I've read the exact same story over and over again.

The banks can stand to take one hell of a haircut. As in a debt jubilee. We've painted ourselves into a corner. Not just homeowners who are underwater, but the US in general. That central bank (the third in US history) isn't doing anyone good aside from the bankers who run it. Andrew Jackson and Ron Paul had and have the right idea -- a central bank is NEVER a good idea. Only the US Treasury Department can, Constitutionally, create what we call money.

I disagree, in some respect, with the article. Many banks are simply servicing loans for unidentified noteholders/investors. As such, Battiata's assertions that it is very difficult to get a loan mod. approved are correct. This is so because the servicing banks stand to gain from a non-judicial foreclosure fees charged to the investor. Moreover, because many properties of which loans have been securitized, the servicing bank must follow complicated guidelines set forth in a Pooling and Service Agreement affecting the realty. For example, if the investors/parties to the PSA stand to lose by virtue of a loan mod., and it is further determined that the Net Present Value of the property, if sold in a Trustee Sale will result in gains, then decisions for the latter are heavily considered. For these, and other reasons, don't expect any sympathy from the lenders and servicing firms whose main goal is to increase their bottom line.

Wells Fargo was one of the banks that settled on cognition of helping homeowners wo re underwater.

I contacted them and was spoken to rudely, kept on old for long periods of time, transferred multiple times, never once got omeone who could answer my questions, and was repeatedly solicited for services from them that had absolutely nothing to do with why I was calling.

The cherry on top of this stale, cyanide laden cake was when, after 40 minutes of holding, transfers, ignorant people, unwanted solicitations, and rudeness I get a high-pitched overly-enthusiastic woman shout out, *"thanks for calling Wlls Fargo, we appreciate your business! Is there anything else we can help you with today!??"*

Do the banks hire people who specialize in severe mental torture??

The deal was signed, now who is making sure these SOBs comply??

We need a government help line to submit complaints when the banks are not cooperating with their end of the deal, does anyone know if this exists?

My husband and I are underwater on our tiny 1 bedroom condo for more than the condo is worth (as in the mortgage is more than double what the place is worth now). Yet we are planning on sticking with it. Not because we really think we'll recover the financial loss or because it is convenient (we would like to start a family but now need to wait until we can afford to move elsewhere). We are sticking it out because it is morally the right thing to do.

It is frustrating how many people (including his parents) have told us to just 'get smart' and walk away from the condo. I do agree that it is really gross to see banks get huge bailouts and never ever seem to help the homeowners, but my husband signed this mortgage contract 6 years ago (before we met), and we intend to keep with our end of the bargain if at all possible.

We are lucky enough to both have decent paying jobs and my husband was smart enough to get a fixed rate mortgage, so we'll do ok. Even it means our plans of having children (and dogs!) need to be delayed 3-5-? years. I just wish that people would stop blaming the banks for everything and take responsibility for their own decisions (which involved the real risk of declining home values even if nobody really thought about that in the height of the housing boom).

twocatshack, I agree with you that people should stop blaming banks and take responsibility for their own actions. However, getting a mortgage is a business transaction and it should be about business, not morality. That's the reason doing business with friends and family is a bad idea is exactly because morality sometimes have to be taken out of the equation. You have to do what makes financial sense for you. The only moral obligation is to stay within the boundaries of law. A mortgage is a contract: you get the money, the bank gets the house as a collateral. It's perfectly fine to break the contract if the total cost to you of doing so is less than the cost of keeping it. A bank has no qualms about taking an action that improves its bottom line (case in point, Morgan Stanley walking away from San Francisco towers in 2009 or Sunstone waking away from W Hotel here in San Diego). Neither should you.

In fact, people like you who are willing to sit back and let them have their way with you give them more power, money, and confidence to continue to be corrupt in the future and harm more people through shoddy loan practices because they know people will just go along with it.

Might I remind you these people signed a deal with the state, and part of that deal is that they get to avoid billions in lawsuits and in exchange **are supposed to be helping people in your (and my) situation.**

How is it 'morally wrong' to make sure companies live up to their agreement in a legal settlement?

Peking_Duck_SD, dmitryb: I wasn't trying to say that banks SHOULDN'T be doing more, because it would be great if they did. I dont actually know any of the particulars of any of the settlements the banks made with the government -- mostly because I dont think they really apply to our situation. Our mortgage is through CalHFA, and while I know that there are programs available -- we don't qualify with too much income.

Anyways - I am not trying to make any moral judgements on the banks or even other homeowners in particular, and I fully recognize that we are lucky in so many ways by having enough income to stay in our home and save for sometime in the future.Sorry if I offended.